Oil & Gas UK Economic Report 2015

6.3 Profitability

6.4 The UK Supply Chain

The ONS has measured the UKCS’ pre-tax rate of return for many years. While rate of return is a recognised accounting metric, it does have limitations when applied to the oil and gas sector, not least because returns are reported pre-tax. This ignores the substantial and additional layers of tax uniquely imposed on the industry (see Appendix B) and the subsequent ineffective valuation of the depreciated capital base. Notwithstanding the limitations of the measure, Figure 20 shows the steady decline of the UKCS’ profitability since 2011, despite strong oil prices over most of the period. The rate of return reached 7.9 per cent in the first quarter of 2015, the latest period for which data are available and the lowest since at least 1997 8 . The industry’s rate of return is now half what it was during the last major downturn in the fourth quarter of 2008, reflecting the fall in oil price coupled with rising costs and record capital investment.

The home-grown oil and gas supply chain is acknowledged to be a major industrial enterprise, servicing the demands of the UKCS and developing a strong international business founded on its domestic success. As shown by Figure 22 opposite, turnover has grown rapidly over the last five years, rising by almost 65 per cent over the period 2008 to 2013, equivalent to a CAGR of ten per cent per annum. The strongest growth has been in the wells and the marine and subsea sectors. Exports of high technology goods and services to the global energy market supplement domestic business and contributed over £16 billion, or 42 per cent, of the supply chain’s £39 billion total turnover in 2013 9 . The supply chain also provides highly skilled employment in support of the indigenous offshore oil and gas industry and increasingly to service the international market.

Figure 20: Office for National Statistics Published Net Rate of Return (Pre-Tax)

70

140

Net Rate of Return (%) Nominal Dated Brent ($/bbl)

60

120

50

100

40

80

30

60

20

40

Net Rate of Return (%)

Nominal Dated Brent ($/bbl)

10

20

0

0

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: ONS, Argus Media

8 See www.ons.gov.uk/ons/dcp171778_410201.pdf 9 EY’s Review of the UK Oilfield Services Industry (March 2015) is available to download at www.ey.com

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ECONOMIC REPORT 2015